Has Corker killed the CFPA?

By Felix Salmon

February 24, 2010

Simon Johnson says that "the consumer protection agency is likely to be gutted as the price of bringing Senator Corker on board", while Tim Fernholz says that bringing Corker along could "cost the Democrats key provisions in the bill -- most notably, an independent Consumer Financial Protection Agency".

But now Taylor Griffin and Tony Fratto are finally spreading what seems like pretty concrete intelligence on the form that the Dodd-Corker compromise is likely to take, in the wake of a weekend trip that the two of them took to Central America.

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The single biggest question hanging over the future of financial reform in the US right now is what exactly is acceptable to Bob Corker in terms of a Consumer Financial Protection Agency. Bloggers on the left are pessimistic: Simon Johnson says that “the consumer protection agency is likely to be gutted as the price of bringing Senator Corker on board”, while Tim Fernholz says that bringing Corker along could “cost the Democrats key provisions in the bill — most notably, an independent Consumer Financial Protection Agency”.

But now Taylor Griffin and Tony Fratto are finally spreading what seems like pretty concrete intelligence on the form that the Dodd-Corker compromise is likely to take, in the wake of a weekend trip that the two of them took to Central America.

The contours of the Dodd/Corker deal look like this: an independent agency with its own source of funding would be established to regulate all federally chartered banks. The agency would have two divisions: one to conduct prudential regulation and one for consumer protection. The agency’s director would decide disputes between the divisions.

We could see this arrangement picking up enough GOP votes to get through the Senate, the big question will be whether this is going to pass muster with an Administration and House Financial Services Committee Chairman who have insisted on a “stand alone” CFPA. This is not completely stand alone, but it’s closer to that description than some of the other compromise proposals.

I’m not entirely clear what this means, but it seems, on its face, to imply that the FDIC, OTS, and OCC will all be combined into one agency, which would then have somewhat conflicting goals, when it comes to the zero-sum tug-of-war between banks and consumers. On the one hand, it would be responsible for ensuring that banks are profitable and well-capitalized; on the other hand, it would be responsible for ensuring that banks don’t gouge consumers in their search for adequate profits.

Most worryingly, the consumer-protection part of the agency would only seem to have control over federally chartered banks. That’s a very bad idea indeed, since it’s precisely the non-bank financial institutions — subprime lenders, payday lenders, non-bank credit card companies, Walmart, etc etc — which need as much if not more regulation, from a consumer protection point of view, as the banks.

And to top it all off, Griffin and Fratto write that even if a Senate compromise passes, it could still be derailed by Barney Frank when it comes to reconciling the House and Senate bills.

So, there’s no good news here, I’m afraid. And I’m inclined to agree with Fernholz that if working with Corker means losing the guts of the CFPA, it’s best to ditch him altogether and just try to push something through the Senate with the support of Democrats alone.